Chartist Claims Debunked With Simple Math [Premium Articles]

A chartist I know sees a massive top formation in S&P 500. I replied to him that he has been wrong several times in the past with such random formations. He argued that although he is frequently wrong, almost 70% of the time, if he can make 4 times what he loses on the average then he can profit longer-term. Math says forget about it.

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Your claim is correct if "Given the relevant timeframes, chartists must trade in many different uncorrelated markets and that may be impossible". However for someone who trades purely on charts formation, this is precisely the point. For a chartist, there is no difference between S&P500, GOLD, Hogs, EURUSD, Bond and individual stock. It's just a chart formation. So it is entirely possible to trade many different uncorrelated markets. I have seen people making money consistently purely on chart formations. Of course there is no predicting power in the charts but for them the chart provides a logical reference point for entry, stop level and profit target.

I have talked about people who make money trading chart formations in past blogs. They are a small group who have experience with price action and some of them use the formations for confirmation and risk management. However, math is math and on top of that scanning many securities for patterns eventually increases data-mining bias for those who do not have the experience in identifying the significant formations.

People focus on how "hard" it is to market time, but I think that you have found the real problem. Even if you have a statistical edge, opportunities arise so infrequently that it can never really be a winning strategy.

Also remember that the market goes up. Unless you are beating an equivalent buy and hold strategy net of fees (and preferably on a risk adjusted basis over a meaningful time period) you haven't achieved anything.

In 1989 my wife and I were sailing on our own boat through the Tuamotus in French Polynesia. At one anchorage I got bored with the daily ritual of snorkeling beautiful coral lagoons and spear fishing. I created a little program in Excel using the random number function. Beautiful charts unfolded before my very eyes. I saved a few and showed them to a fellow sailor on his boat, whilst keeping mum about the source. He was a former commodities trader who believed in classical chart functions. Some of the charts showed beautiful head-and-shoulder formations, and he waxed eloquent on their significance. I never told him where they came from.
Cheers.

You can make money even from random trading, if you have a logical exit and risk management strategy. You can flip coins to tell you to go long or short and still make money from it. Just because chart patterns may be random doesn't mean that you can't make money off them.

There were distinct times when the chartists were saying breakout and I was channeling Obi Wan Kenobe to say this is not the breakout you re looking for. It does not refer to retail-sized products, which can have very large premia sometimes, due to inelastic manufacturing capacity.